ACCA Advanced Taxation (ATX) Practice Exam

What defines a close company?

1. A limited company with five or fewer 'participators'

2. A company that does not pay dividends

3. A company controlled by a single stakeholder

4. A company with less than 50 employees

The correct answer is: A limited company with five or fewer 'participators'

A close company is defined as a limited company where five or fewer individuals have a significant controlling interest, commonly referred to as 'participators'. In this context, the term 'participator' includes individuals who are shareholders or have rights to income from the company. The essence of this definition is rooted in the control and ownership structure of the company, emphasizing that a close company is tightly held by a small group of individuals. This classification has implications for tax treatments, as close companies may face different compliance requirements and tax considerations compared to publicly owned or wider-held companies. Other options provided do not align with this definition. A company that does not pay dividends can still be a close company if it meets the criteria regarding participators. Similarly, a company controlled by a single stakeholder may not fit the specific character of a close company if it involves multiple participators. Finally, the number of employees does not factor into the classification of a close company; hence a company with fewer than 50 employees does not necessarily mean it is a close company if it does not meet the participator criterion. Understanding the definition of a close company aids in grasping broader taxation issues associated with corporate structure and tax obligations.